Analyst Report Kito Corporation

ANLYSTNET Company Report

KITO CORPORATION (Code 6409: First Section of the Tokyo Stock Exchange) Issue Date: September 9, 2013

1/29

This report is created by J-Phoenix Research Inc. (hereinafter JPR) simply for the purpose of providing information to the investors, not for soliciting any trading of securities. Although the report is

based on information and resources that JPR believed to be reliable, JPR does not guarantee against the accuracy, reliability, completeness, conformity or timeliness of any of the content. JPR shall not

be liable for any direct or indirect damage caused by the investors resulting from the use or reliance on the information contained herein. Investors are responsible for their own trading of securities and

other financial products. The intellectual property rights of this report belong to Toward the Infinite World, Inc. No part of this report may be reproduced, transcribed or cited without the written consent

of the company.

Operating Leverage may Bring Profit Growth Higher than Sales Growth

Global Leader in Hoist and Crane Market

Kito Corporation mainly manufactures chain blocks, lever blocks, chain hoists, wire rope

hoists, and cranes -- all of which are used on material handling sites to lift, carry and/or

fix heavy materials. The products are used on construction sites, inside factories, and in

the yards. The company has a dominant share of 60% in Japan and is also a market

leader in the United States and China.

Established Competitive Superiority

Since its establishment in 1932, Kito Corporation has responded to its customers’ needs

for higher security and productivity. Providing high quality products and services

exceeding the customers' expectations in “Safety”, “Durability”, and “Usability” by

overcoming cost constraints, the company has established a clear differentiation in its

reliable and high quality products and has built strong customer relations through the

agency networks. It has established a strong position in company mergers and

acquisitions in the hoist markets in Japan, the USA, and China. The company promotes a

business model which strengthens competitive superiority together with revolutionary

technology. This allows the company to enjoy high profitability for a long time once its

leadership position is established. The company is currently implementing this

successful business model in Japan, the USA, and China.

Operating Leverage Brings Profit Growth Higher than Sales Growth

Kito Corporation is expanding its demand by increasing public investments, capital

investments, and infrastructure maintenance investments -- as well as by raising

operation rates of construction equipment. With industrial advancement, the demand for

the company’s precise and high quality products is expanding globally. The company is

not only expanding its market share in Japan, the USA, and China, but is also developing

business bases by establishing agency networks and manufacturing sites in newly

industrialized countries. In addition, the company is expanding its production range and

its services, and it has achieved a profit growth much higher than its sales growth for the

past three years due to the operating leverage effect. As the company is promoting a

strategy in which it is expanding its business while controlling fixed expenses, the

operating leverage is expected to continue to bring a higher profit growth in the future. A

weak yen is also contributing to the company’s profit ratio increase. The company’s

Midterm Management Plan stipulates a target sales amount of 58 billion yen and an

operating profit of 7 billion yen for 2015. This operating profit certainly seems to be

within reach.

Basic Information

J-Phoenix Research, Inc.

Osamu Miyashita, CFA

Company Information

Address Yamanashi Pref.

President Yoshio Kito

Establishment November, 1932

Capital 3,976 million yen

Listing Date August 9, 2007

URL www.kito.co.jp

Business Type Machinery

Number of

Employees

1898 (Consolidated)

633

(Non-consolidated) Key Indicators as of September 9, 2013

Share Price ¥ 1,467

52 Weeks’ Highest Price ¥ 1,937

52 Weeks’ Lowest Price ¥ 597

Number of Shares Issued 13,524,100 shares

Mandatory Unit 100 shares

Total Market Cap ¥ 18,953 million

Expected Dividend ¥ 30

Expected EPS ¥ 147

Expected PER 10.0x

Actual BPS ¥ 1,406

Actual PBR 1.04x

Business Performance Sales

(million yen)

Year-by- Year (%)

Operating Income

(million yen)

Year-by- Year (%)

Ordinary Income

(million yen)

Year-by- Year (%)

Current Net Income

(million yen)

Year-by- Year (%)

EPS (yen)

Share Price (yen) Highest

Price Lowest Price

March, 2011 Actual 28,095 17.4% 1,119 156.1% 885 87.9% 423 246.7% 35 1,209 560

March, 2012 Actual 33,282 18.5% 1,658 48.2% 1,572 77.6% 662 156.5% 51 770 505

March, 2013 Actual 35,501 6.7% 2,510 51.4% 2,440 175.7% 1,023 54.5% 79 1,029 535

April-June, 2012 Actual 7,430 12.7% 139 Positive

Turnaround 30 Positive

Turnaround -59 Negative

Turnaround -5 721 535

April-June, 2013 Actual 7,996 7.6% 360 159.0% 420 1,300.0% 230 Positive

Turnaround 18 1,937 910

March, 2014 Estimated

(Announced in May, 2013) 42,000 18.3% 3,600 43.4% 3,300 35.2% 1,900 85.7% 147 －－

KITO CORPORATION (Code 6409: First Section of the Tokyo Stock Exchange) Issue Date: September 9, 2013 KITO CORPORATION (Code 6409: First Section of the Tokyo Stock

Exchange) Issue Date: September 9, 2013

2/29





of the company.

Established in 1932

Strong in high quality hoist

market

Expanding business overseas

since 1990

Corporate revolution in 2003

by going private

Aiming to truly become “the

No. 1 global hoist

manufacturer”

■Global leader in high quality hoist market

Established in 1932, Kito Corporation has become the leader of the high quality hoist market

industry in Japan with its stable supply capability, its maintenance of a nationwide agency

network sales force, and its excellent service capability. Although the company has made

full-scale advancement in the global market since 1990 beginning with the USA and China,

when the domestic market matured, the company’s business performance deteriorated as the

economy slowed. Being unable to utilize the growth opportunities overseas, the JASDAQ listed

company went private by accepting capital participation from the Carlyle Group (a US

investment fund) in order to promote corporate revolution. The company paid excessive

interest-bearing loans, assigned its non-core business to the Logistic Systems Division,

strengthened the company’s overseas subsidiaries, and succeeded in recovering its business

performance by 2007, when it re-listed on the First Section of the Tokyo Stock Exchange. With

its management vision of “Truly becoming ‘The No. 1 Global Hoist Manufacturer’ ” with its

goal of achieving100 billion dollars in sales, the company is implementing various strategies in

“matured markets (Japan, North America and Western Europe)” and “growing markets (China,

other Asian countries and Russia)”.

1932 Established KITO MANUFACTURING COMPANY in Omori, Tokyo.

1970 Changed corporate name to KITO CORPORATION.

1983 Main factory moved from Kawasaki City to Showa-cho, Yamanashi Prefecture.

1990 Established HARRINGTON HOISTS, INC. in U.S.

1992 Completed Tokyo headquarters (Yoyogi, Shibuya-ku).

1993 Established KITO CANADA, Inc. in Canada.

1995 Established JIANGYIN KITO CRANE CO., LTD. in China.

1996 Established KITO PHILIPPINES, INC. in Philippines.

1997 Established SIAM KITO CO., LTD. in Thailand.

2003 Accepted capital participation from Carlyle Group, US investment fund.

2004 Established SHANGHAI KITO TRADING CO., LTD. in China.

Assigned Logistic Systems Division.

2005 Tokyo Head Office moved from Shibuya-ku to Tokyo Opera City Tower in

Shinjuku-ku.

Completed new factory JIANGYIN KITO CRANE CO., LTD. in China.

2006 Established KITO EUROPE GMBH in Germany.

2007 Listed company on First Section of Tokyo Stock Exchange.

2008 Completed new factory SIAM KITO CO., LTD. in Thailand

Established KITO KOREA CO., LTD. in Korea.

2010 Business and capital alliance with KONERCRANES PLC (Finland).

Signed agreement to purchase all shares of ARMSEL MHE PVT., LTD. (India).

Carlyle Group sold entire holding of KITO common stock.

2011 Tokyo Head Office moved from Tokyo Opera City Tower to Shinjuku NS Building.

Company Information

Company Information

Corporate History



3/29





of the company.

Provide “Safety”,

“Durability” and “Usability”

by overcoming cost

constraints

Provide higher than expected

customer satisfaction

Established leading position

in Japan, USA and China

Hold nearly 10% share of

global market

Aim to have 20% global

share

Target customers who

appreciate high-quality

products and services and

provide products and services

differentiated by price and

performance

Create new segment of

high-quality hoist market

■ Building business strategy based on company’s philosophy

Kito Corporation has the following philosophy:

Kito’s mission – Deliver unmatched satisfaction to its customers

Kito’s innovation – Change and challenge always

Kito’s quality – Its driving “Spirit” is “Quality”

Value of Kito people – Integrity, honesty, pride and gratitude

Kito Corporation has been realizing its corporate philosophy through products and customer

service through the implementation of product strategy, area strategy, and manufacturing strategy.

In its main products, the chain block, lever block, chain hoist, and the wire rope hoist and crane,

the company has been providing “Safety”, “Durability” and “Usability” by overcoming cost

constraints. By bringing more satisfaction to its customers than expected, the company has

established a leading position in Japan, the USA and China (Chart 1). Globally, the four largest

companies, including Kito and smaller companies, are making 500 billion yen in the hoist and

crane market; and Kito has nearly a 10% share of the market. The company is aiming to have a

20% share and long term net sales of 100 billion yen.

Chart 1:Kito Corporation’s Share in Hoist Markets in Japan, USA and China

(Source) Created by JPR based on interview with Kito Corporation.

(Note) The data shown is from 2012 for USA and Japan, and from 2010 for China. The target products for

Japan are lever block, manual chain block, and electric chain block; for China, lever block, manual chain

block, electric chain block, and wire rope hoist.

■Three concepts and three differentiation strategies to become global leader

The outline of the company’s strategies is as follows:

Target customers who appreciate high-quality products and services, differentiate products

through price and performance, create a new segment of high-quality hoists in the market,

and establish a strong and long-term competitive superiority not only in Japan, the USA and

China, but also globally.

In order to achieve the above strategies, as in the product and service concepts to reflect its

corporate philosophy, the company places importance on “Safety”, “Durability”, and “Usability”.

With these product and service concepts as its base, the company promotes three differentiation

strategies: “differentiate chain products”, “differentiate electric products” and “differentiate

services”. As for expansion in the global market, the company actively promotes the M&A

Strategy for a speedy market penetration.

Features of Business Model

Business Strategy Based

on Company’s

Philosophy

Outline of Long-Term Strategies

Japan USA China

Others

KITO



4/29





of the company.

Promote three things:

“differentiate chain

products”, “differentiate

electric products” and

“differentiate services”

“Safety”, “Durability” and

“Usability” higher than

customers’ expectation

First: differentiate chain

products

Second: differentiate electric

products

Third: differentiate services

■Provide values higher than customers’ expectation from three perspectives

In “Safety”, Kito Corporation places importance in (1) high quality products developed originally

from the materials, (2) load bearing capacity beyond specification, two- or three- folds of safety,

and (3) well-developed safety education. In “Durability”, the company provides (1) longer

product life than the warranty period and (2) maintenance service beyond the warranty period. In

“Usability”, the company places importance in (1) smooth operation, (2) precise positioning, and

(3) swift after-sale services.

Chart 2: Product and Service Concepts to Reflect Corporate Philosophy


■Three differentiation strategies to increase company’s market share and penetration

First: differentiate chain products: By manufacturing the materials, Kito Corporation develops

products with high load capacity, long life, and high quality. It pursues increasing usability and

durability via its accurate rewinding mechanism. To improve work efficiency, the company was

first in the world to introduce a no-load rewinding mechanism. The company has led the industry

in technology innovations.

Second: differentiate electric products: The company pursues higher accuracy and operability

with highly functional mechanisms, such as the inverter control. In manufacturing

semiconductors, which are required for precise positioning and cutting-edge precision, the

company’s products carry high credibility.

Third: differentiate services: This is to improve customers’ satisfaction by enhancing the

company’s service through safety education, trainings, swift delivery, and long-term product and

quality guarantees.

By implementing one or more of the three strategies in accordance with the market environment,

the company strives to meet the following goals: to build a strong relationship with customers

based on trust, to create a new segment of high-quality hoists, and to build the strongest long-term

competitive superiority in the market. Until now, the company has provided swift delivery by

inventory, but the group will change this to the local production for local consumption system in

the emerging countries.

High quality products developed

originally from materials Load bearing capacity beyond

specification,

two- or three- folds of safety Well-developed safety education

Three things customers expect in

hoists “Durability”

higher than

customers’

expectation

“Safety” higher

than customers’

expectation

“Usability”

higher than

customers’

expectation

Smooth operation Precise positioning Swift after-sale services

Longer product life than

warranty period

Maintenance service beyond

warranty period

Three Product and

Service Concepts

Reflect Corporate

Philosophy

Three Differentiation

Strategies



5/29





of the company.

Established market

penetration by differentiating

company’s services in USA

Speeding up overseas

movement and strengthening

management resources using

M&A

The driving forces are

advanced industrialization,

expansion of industrial

activities, and investment in

construction

Expansion of infrastructure

maintenance will create more

demand for company’s

products

■Flexible strategies according to environment of each country and area

Kito Corporation is adapting and implementing its three strategies according to business

environments and competitive climates. A full-scale expansion to the USA began in the 1900s

when the company purchased Harrington Hoists, Inc. People began to see the high quality

products the company provided when the company adhered to the third strategy of “differentiating

the services”, especially by swift delivery. Then the company fostered trust of its customers by

“differentiating the chain products” and “differentiating the electric products”. Kito Corporation

then slowly expanded its business and established its position as the industry’s leader. The

company also expanded its market share utilizing the third strategy of differentiation in China. In

the rest of Southeast Asia, the company targeted the branches of Japanese companies and pursued

market penetration via the first and second strategies of differentiation.

■Utilizing capital affiliation and M&A strategy to strengthen company’s position

Kito Corporation has actively promoted capital affiliation and M&A strategy to (1) strengthen its

position as the industry leader in developed industrial areas and (2) penetrate the market in

emerging industrial areas. The company’s expansion began in USA and China via acquisitions and

capital affiliation. In March, 2010, the company group garnished business and capital affiliation

with the world’s largest crane manufacturer “Konecranes Plc” in order to expand its portfolio and

become a larger hoist manufacturer. By combining the prominent position of Konecranes in the

crane market and Kito’s high-quality hoists, it became possible to provide a one-stop service

globally to respond to wide and advanced material handling needs. In emerging industrial areas,

there are high turn-key needs to have a hoist and a crane as a set. Therefore, the company is

planning to penetrate the market by expanding its crane business to respond to this demand. The

company purchased a medium-sized crane manufacturer Armsel MHE Pvt. Ltd. (India). The

company will continue to actively utilize this M&A strategy in emerging countries in the future.

■Products and their usages: driving forces are advanced industrialization, expansion of

industrial activities and investment in construction

Kito Corporation provides a wide range of products as shown in Chart 3. There are four main

products: (1) Manual chain block, (2) Lever block, (3) Electric chain block, and (4) Wire rope

hoist. All main products are used in various material handling sites. The products are used

individually or together with a crane as a loading device. The driving forces for growth are: the

expansion of public investment, an investment in construction, infrastructure maintenance, and an

increase of operation rates of construction equipment. The products are also used in various

operations to lift, carry, and fix materials -- including setting up equipment at concert venues and

inside hotel kitchens. When the demand for more precise and higher quality products increases by

technical advancement in the industry, the demand for the company’s high-quality products

increases. Global industrialization will provide a critical boost for the company for a long time.

The immediate market environment is good due to reconstruction demand and infrastructure

maintenance demand. An expansion of construction investment in Japan will also create more

demand for the company’s products.

Flexible Strategies

According to

Environment of

Country and Area

Flexible M&A Strategy

Main Products, Usage

and Driving Forces for

Growth



6/29





of the company.

Manual Chain Block

Lever Block

Electric Chain Block

Electric Wire Hoist

Chart 3: Product Information

(Source) Created by JPR from information provided by Kito Corporation.

Chart 4: Details of Four Main Products

Man

ual

Manual Chain Block Lever Block

Leading product in Japan and USA

Convenient manual loading device

with wheel of chain with loading hook

on tip

Main usage: Earth work, construction

work, open-air mining work

Driving force for growth: Public

investment, various private capital

investments, expansion of

infrastructure maintenance


Device to safely fit packages and/or

work objects

Main usage: Earth work, construction

work, outside mining work, physical

distribution

Driving force for growth: Public

investment, various private capital

investments, expansion of

infrastructure maintenance, load

increase

Electric

Electric Chain Block Wire Rope Hoist


Electric-powered chain block.

Operated with a hand switch. Enables

distance operation away from loads.

Main usage: Inside factories, material

handling in yards

Driving force for growth: Various

private capital investments, increase of

operation rates of manufacturing

equipment

Industry leader in China

Load by rewinding wire with drum.

Suitable for large-volume work.

Mainly used in large facilities.

Main usage: Inside factories, material

handling in yards

Driving force for growth: Various

private capital investments, increase

of operation rates of manufacturing

equipment


Manual Products Electric Products Cranes and Other Products Products Index

Manual Chain Block

Lever

Block

Electric

Chain Block Rope Hoist

Manual Chain Block (100t) Light Crane Overhead

Traveling Crane

Slings

Saddles/Crane Components

System Crane Manipulator

Various Parts and Maintenance Services

Sta

nd

ard

Pro

du

cts

Sp

ecia

l Pro

du

cts O

thers

Standard

Products for

Customers’

General Needs

Individually

Designed and

Manufactured

Products for

Customers’

Various Needs

After-sales

Services, etc.

Sales Share: 73%

Sales Share: 19%

Sales Share: 8%



7/29





of the company.

Industry which greatly

affected foreign exchange

fluctuation

If JPY-USD exchange rate

drops by 1 yen, company’s

profit will increase by

approximately 80 million

yen.

Very clear structure of

variable expenses and fixed

expenses

■ Industry greatly affected by foreign exchange fluctuation

Due to the company’s profit structure, the cost of sales in its US factory consists mostly of

materials exported from Japan; and therefore, the USD-JPY exchange rate and the change in

dollar based sales in the USA affect the group’s gross profit sales. According to the company,

because the net sales in the USA is close to 10 billion yen, if the value of yen drops by 1, this can

bring an increase of approximately 80 million yen. The estimated yen value against the USD for

the March, 2014 period is 90 yen; but in comparing the estimated rate of 83.1 yen for the March,

2013 period, it is a drop of approximately 7 yen. As of September 6, 2013, the exchange rate was

99.99, which was a drop of about 17 yen compared to the estimated rate for the March, 2013

period. The profit increases are estimated as 552 million yen and 1,351 million yen respectively.

Chart 5: Influence of Exchange Rate

Estimated Exchange Rate

in March, 2014 Period

Actual Exchange Rate on

September 6, 2013

¥ 90 ¥ 99.99

Difference with Estimated Rate of

83.1 yen in March, 2013 ¥ 6.9 ¥ 16.89

Profit Increase 1 yen can Bring

(million yen) 552 1,378

(Source) Estimated exchange rates were taken from information provided by Kito Corporation. Exchange rate

was central rate from Foreign Exchange Rates of Financial Markets Department, Bank of Japan. Profit

increase from 1 yen taken from comment by Kito Corporation.

■Statistically highly interpretable structure of variable expenses and fixed expenses

estimated from previous results

Chart 6 below shows the relationship between quarterly net sales in yen using the exchange rate

for the March, 2013 period (X axis) and quarterly cost of sales or sales administrative expenses (Y

axis).

Chart 6: Relationship of Sales Administrative Expenses/Cost of Sales with Net Sales

(Source) Created by JPR from Kito Corporation's short financial reports.

y = 0.1321x + 990.03

R² = 0.6476

0

5,000

0 2,000 4,000 6,000 8,000 10,000 12,000

Sales Administrative Expenses (Y) and Net Sales

without Foreign Exchange Influence (X)

(Quarterly)Million yen

y = 0.6275x + 507.19

R² = 0.953

0

10,000

0 2,000 4,000 6,000 8,000 10,000 12,000

Cost of Sales (Y) and Net Sales

without Foreign Exchange Influence (X)

(Quarterly)Million yen

Financial Features



8/29





of the company.

Variable expense ratio and

fixed expenses can be

estimated.

Profit ratio improved by sales

increase due to operating

leverage effect

Improving production

efficiency does not require

much additional fixed

expenses in order to expand

sales

Continuous operating

leverage effects can be

expected.

Using linear regression on both types of sales administrative expenses, the coefficient is 13.2%,

and the intercept is 990 million yen; and for cost of sales, the coefficient is 62.7%, and the

intercept is 507 million yen. The determination coefficients are 0.64 and 0.95 respectively and

show a very high interpretability. The total of both coefficients and intercepts, 75.96% and 1,497

million yen (5,998 if annualized), can be estimated as variable expense ratios and fixed expenses

respectively. However, the variation of fixed expenses is also included in the variable expenses,

therefore the amount of variable expenses here is higher than normal. In addition, 24.04% (1 –

variable expense ratio) is the marginal profit ratio. In the process of this calculation, variable

expenses are estimated more than necessary, so the rate is lower than the marginal profit ratio.

Still, the statistical interpretability of these figures is extremely high and can be used as a guide

for future increases in profit ratio. The value calculated by dividing the fixed expenses by the

estimated marginal profit ratio becomes a theoretical breakeven point, and it is estimated at

approximately 25 billion yen. When net sales goes over the breakeven point, the profit growth will

exceed the sales growth. Since the March, 2011 period when the net sales surpassed 25 billion

yen, the sales growth has been 17.4%, 18.5%, and 6.7%; and the operating profit growth has been

156.1%, 48.2%, and 51.4%, and far exceeded the sales growth.

■Double effects from operating leverage and exchange rate

Chart 7 shows the results of trial calculation of operating leverage effect if the fixed exchanges (1)

remain at the current level, (2) increase by 5%, and (3) increase by 10%, based on the fixed

expenses calculated from linear regression. The operating profit is 3,600 million yen in the

company plan for the current period, and if fixed expenses do not increase, the operating profit

can go up to 4,796 million yen (the figure in bold). The company is aiming for net sales of 58

billion yen and an operating profit of 7 billion yen for the March, 2016 period. If the fixed

expenses remain at the current level and the exchange rate is 90 yen to 1 USD, the company can

achieve net sales of 55 billion yen and an operating profit of 7 billion yen (the figure in italics).

The company is planning to increase its sales by improving production efficiency which does not

require much additional fixed expenses; therefore, an operating leverage effect can be expected.

Chart 7: Estimation of Operating Profit with Effects of Operating Leverage and Exchange Rate

(Unit: million yen)

Estimated operating profit

(in gray cells)

with exchange rate effect

Net sales when 1 USD is ¥ 90

2014/3

Company

Plan

2016/03

Company

Goal

42,000 45,000 50,000 55,000 58,000

Estimated

Fixed

Expenses

Unchanged 5,988 4,796 5,517 6,719 7,921 8,642

+ 5% 6,287 4,497 5,218 6,420 7,622 8,343

+ 10% 6,587 4,197 4,918 6,120 7,322 8,044

Estimated operating profit

(in gray cells)

without exchange rate effect

but with operating leverage effect

Net sales when 1 USD is ¥ 83.1

(excluding gain from foreign exchange)

41,095 44,095 49,095 54,095 57,095

Estimated

Fixed

Expenses

Unchanged 5,988 3,891 4,613 5,815 7,017 7,738

+ 5% 6,287 3,592 4,313 5,515 6,717 7,438

+ 10% 6,587 3,293 4,014 5,216 6,418 7,139

(Note) Calculation method of leverage effect when 1 USD is ¥ 90: (1) Planned net sales in US market for

March, 2014 period: 11,800 million yen, (2) 11,800 million yen in USD when 1 USD is ¥ 90: USD 131.11

million, (3) USD 131.11 million in yen when 1 USD is ¥ 83.1: 10,895 million yen, (1) – (3) = 11,800

million yen – 10,895 million yen = 905 million yen = profit increase by foreign exchange

(Source) JPR

Relatively Large Effects from

Operating Leverage and Exchange Rate



9/29





of the company.

Execute strategies from four

different perspectives and

aim to speed up to achieve

strategies by M&A

Area Strategies: Promote

different strategies for

developed industrial areas

and emerging industrial areas

Product Strategies: Pursue

further cost cuts while

keeping basic functions, and

expand portfolio

Manufacturing Strategies:

Maximum use of existing

facilities, and local

production for local

consumption

Promotional Strategies:

Matrix organization of areas

and functions, strengthen

human resources and

penetrate “KITO Way”

Developed industrial areas:

Improve product functions,

add extra values to products,

expand portfolio, diversify

and improve customer

services, and eventually

increase market share.

Emerging industrial areas:

Respond to turn-key needs,

and promote market

penetration by establishing

distribution network

■Execute strategies from four different perspectives and aim to speed up to achieve

strategies by M&A

With “Truly becoming ‘The No. 1 Global Hoist Manufacturer’” as its corporate vision in its

Midterm Management Plan, Kito Corporation is aiming for (1) net sales of 58 billion yen, (2) an

operating profit of 700 billion yen and an operating profit ratio of 12% for the March, 2016

period. The company’s strategies are divided into four categories: (1) Area Strategies, (2) Product

Strategies, (3) Manufacturing Strategies, and (4) Promotional Strategies. The summary of each

category is shown in Chart 8.

Chart 8: Kito’s Four Strategy Areas

(1) Area Strategies (2) Product Strategies

Japan, USA and China: Increase

company’s market share by improving

product functions, expanding portfolio

and services and strengthen supply

capability

Rest of Asia: Achieve market

penetration by providing total services

including cranes and direct access

Other areas: Achieve market

penetration by focusing on growth

opportunities

Check functions and performances of

main products and pursue further cost

cuts while maintaining basic functions

Expand wire rope hoist operation

globally

Expand crane components (including

girders and saddles)

Develop increased ability to make

proposals, improve services and

develop synergy products with hoists

(3) Manufacturing Strategies (4) Promotional Strategies

Maximum use of existing

manufacturing facilities

Promote local production for local

consumption

Keep up with portfolio expansion

Establish matrix organization of areas

and functions (products and

manufacturing). Recruitment from

inside and outside group. Execute

appraisal system.

Penetrate “KITO Way” with corporate

philosophy, code of conduct, concept

of values and business procedures.

(Source) Created by JPR based on interview with Kito Corporation and information provided by company.

■Area Strategies: Establish and implement strategies according to local environment and

level of industrial development

In developed industrial areas (Japan, the USA, Europe and the coastal regions of China), even

when the market growth is slow, the company will pursue more growth by improving product

functions, adding extra value to the products, expanding its portfolio, diversifying and improving

customer services, and eventually increasing its market share.

In emerging industrial areas, the need for the company’s high-quality products in heavily

industrialized situations is not high, and there is a high demand for basic products and turn-key

products. Therefore, the company is pursuing strategies to respond to these needs by providing all

crane components and hoists. In addition, because the distribution network is under developed, the

standard strategy will be to establish customer access via direct sales. In order to speed up the

above strategies, the company is actively engaged in M&A in various countries. Chart 9 shows the

image of the above strategies.

Growth Strategies

Summary of Growth

Strategies

(1) Area Strategies



10/29





of the company.

Steadily work toward

claiming industry’s leading

position globally

Strengthen product appeal:

enhance competitive power

by improving functions and

performance, downsizing and

weight saving products and

improving services

Expand company’s portfolio:

improve product line-up to

respond to various customer

needs

Chart 9: Establishing Company’s Position in Each Market


■Product Strategies: Speed up development to become comprehensive hoist manufacturer

Kito Corporation is (1) strengthening the product appeal (enhancing competitive power by

improving functions and performance, downsizing and weight saving its products and improving

its services) and (2) expanding its portfolio (improving the product line-up to respond to various

customer needs) (Chart 10).

Chart 10: Becoming Comprehensive Hoist Manufacturer by Expanding Hoist-Related Businesses


Steady implementation of company’s strategies.

Speeding up movement to become industry leader in each area by M&A.

Japan Established high-quality market in hoist market

after 80 years, starting from nothing.

USA

Moved in 1980. Purchased Harrington, a

dealer, in 1990. Established industry

leader position after 20 years.

China Moved in 1995. Since

purchase, company became industry leader.

Beco

min

g g

lob

al leader in

ho

ist mark

et

Established

industry’s

leading

position

Work

toward

claiming

industry’s

leading

position India

Purchased medium-size crane

manufacturing company in 2010

South- Eastern Asia

Began full-scale advancement after the

year 2000.

Emerging

Countries

& Others

Obtain sales bases.

Consider M&A as

opportunity arises

(2) Product Strategies

Service-Based Business

Increase Range of

Service-Based Business

Hoist Crane System: System to Move

Hoist A Large

Structure Crane/Hoist Accessories

Make Full-Scale Entry

into WRH Business

Develop New Areas of

Business

Improve Crane System



11/29





of the company.

Make full-scale entry into

Wire Rope Hoist Business

Respond to turn-key needs by

improving crane system

Increase range in

Service-based Business:

contribute to improving profit

ratio

Develop new areas of

business: add products

including slings as

accessory for hoist/crane and

winch or balancer as

peripheral device

Make various efforts to

improve productivity with

small capital investments

Limit fixed expense increase

and keep expansion rate of

operating leverage effect by

expanding size

Further strengthening of global

management system

As for the expansion of the company’s portfolio, the first move is to make a full-scale entry into

the Wire Rope Hoist (WRH) Business. By supplying the Konecranes products, Kito’s portfolio is

expanding as a comprehensive hoist manufacturer, and this enables the company to respond to a

wide range of customer needs. Secondly, it is necessary to improve the existing crane system. By

providing hoists to structures to support the cranes at one-stop, the company will respond to the

turn-key needs in emerging countries. Thirdly, it is necessary to increase the range of

Service-based Business. Establishing a comprehensive maintenance service model, the company

will improve its ability to make long-term benefit proposals for customers. With a high gross

margin ratio, the Service-based Business will contribute to improving the profit ratio. Lastly, it is

necessary to develop new areas of business. By adding products including slings as an accessory

for a hoist/crane and winch or balancer as a peripheral device, the company will respond to wider

customer needs. Through these efforts, the company will expand its business to a more standard

and larger hoist market (Chart 11).

Chart 11: Business Expansion by Strengthening Product Appeal and Expanding Portfolio


■Manufacturing Strategies: Utilize existing capital investment and expand operating

leverage effect

Kito Corporation is making various efforts to improve productivity with small capital investments

by (1) optimizing the global production system by utilizing existing facilities to the maximum

rather than making new investments, (2) increasing production bases for local production of local

consumption, and (3) introducing a high-mix single line manufacturing system. As a result, the

company aims to utilize the existing facilities, limit new capital investment, and increase the

actual gross margin ratio. The company limits fixed expense increases, keeping the expansion rate

of the operating leverage effect by expanding its size, and expects a growth increase with profit.

From the above efforts, the company can respond to production fluctuations, shorten the time

from receiving orders to delivery time, and expect a lower requirement for holding inventory.

■Promotional Strategies: Improve global management system to implement company’s

strategies without fail

When Kito Corporation went private and promoted a corporate revolution, it began to improve its

global management system. Now, in order to strengthen its management system, the company is

planning to (1) introduce a matrix organization: establish the group as a matrix organization

between the area management divisions and the functional divisions and integrate the corporate

group’s business operation further, and (2) nurture and recruit global human resources: while

managing human resources within the group altogether, the company will recruit from inside and

outside the group as necessary and conduct the appraisal system. The company will focus on

active recruitment of human resources for the company’s mission and global advancement,

develop existing resources, and perform an appraisal in accordance with the mission.

Small Scale

Large Scale

High Quality Standard

Global Hoist Market Aiming for Leading Position

in Main Hoist Markets Globally

Kito is in Leading Position in Japan, USA and China in Segments where Company has Always been Strong.

(3) Manufacturing

Strategies

(4) Promotional Strategies



12/29





of the company.

Transparency of company’s

governance is assured

Structure makes it easy to

check management from third

person’s perspective.

■Strong leadership of Yoshio Kito, member of the founding family and president

The transparency of the company’s governance is assured by having 3 outside officers of seven

board members. With a strong leadership as a member of the founding family and president,

Yoshio Kito has made crucial decisions such as establishing and spreading the corporate

philosophy, providing products and services to reflect the corporate philosophy, promoting a

corporate revolution by accepting capital from the Carlyle Group, and establishing the Midterm

Management Plan of truly becoming “The No. 1 Global Hoist Manufacturer”; and thus he

successfully developed the company as a global manufacturer. His leadership will remain the

driving force for the continued growth of the company. The next long-term issue will be to

nurture a new leader who can succeed President Kito.

Chart 12: Board Members

President & CEO Yoshio Kito

Managing Directors Tsuneo Yuzuhara, Hajime Ito

Director Shigeki Osozawa

Directors (Outside) Kazuhiro Yamada, Keizo Tannawa, Katsumori Matsushima

Standing Auditor Noboru Sato

Auditors (Outside) Masatoshi Yasunaga, Kiyohito Hamada


■Affiliated partner is top shareholder

Kito Corporation’s affiliated company Konecranes is the top shareholder. The second to the fifth

largest shareholders are institution investors. Judging from the shareholders’ structure, it is easy

to check the management from a third person’s perspective.

Chart 13: Main Shareholders (as of March 31, 2013)

Name of Shareholder Shares Owned

Voting

Right

Ratio

1 CBLDN KONECRANES FINANCE OY 29,750 23.02%

2 GOLDMAN SACHS INTERNATIONAL 7,378 5.71%

3 Japan Trustee Services Bank, Ltd. 6,202 4.80%

4 CREDIT SUISSE SECURITIES (USA) LLC-SPCI.

FOR EXCL. BEN 6,068 4.69%

5 The Master Trust Bank of Japan, Ltd. 5,934 4.59%

6 Yoshio Kito 4,520 3.49%

7 Sumitomo Mitsui Banking Corporation 3,352 2.59%

8 KITO Ownership Association 2,345 1.81%

9 Nippon Life Insurance Company 2,000 1.54%

10 NOMURA PB NOMINIEES LIMITED

OMNIBUS-MARGIN (CASHPB) 1,421 1.09%


■Return to shareholders is 20% standard: room for increase in ratio if company’s profit

increases.

In order to keep a steady dividend, the company provides a dividend payout ratio of at least 20%.

EPS in the company plan for the year is 147.06 yen; and the planned dividend is 30 yen per

share, which is already 20.4%. Thus, if the company’s profit increases, there is room for a slight

increase in the ratio.

Corporate Governance

Board Members

Large Shareholders’

Structure

Return to Shareholders



13/29





of the company.

Many positive elements in

both long and short views

Threats of fiercer

head-to-head competition

among global companies,

which used to have own

segments, and emergence of

low-price products by

Chinese companies

■There are many positive elements, but fiercer competition among global companies is the

risk.

The external environment of the business model, which focuses on the high-quality hoist market,

has many positive elements in the overall long-term view. Industrial advances and higher needs to

improve productivity will certainly increase the need to use the company’s products which are

clearly differentiated in price and performance with the features of “Safety”, “Durability”, and

“Usability” both in developed industrial areas and emerging industrial areas. In the short-term

view, infrastructure maintenance investment and reconstruction demand in Japan will serve as a

driving force. The threats will be fiercer head-to-head competition amongst global companies,

which used to have their own exclusive segments, and the emergence of low-price products by

Chinese companies.

Chart 14: Main External Environment Elements

Opportunities

· Room for high-quality products in developed countries

· Possibility of market share increase by differentiation with high-quality wire

rope hoists

· Need in emerging countries for high-quality hoists due to industrialization

· Demand for infrastructure reconstruction in Japan

· Higher awareness for safety and increased customer complaints

Threats

· Fiercer head-to-head competition among global companies which used to

have own segments

· Entry of low-price products by Chinese companies


Chart 15: Global Companies in Hoist & Crane Market

Currency

Unit Name of Company

Current

Year-End

Current

Period Sales

Current Period

Operating

Profit

Million

Yen

Terex Material Handling &

Port Solutions AG 2012/9 135,852 13,585

Konecranes Oyj 2014/3 279,900 18,421

Columbus McKinnon Corp. 2014/3 57,408 5,413

KITO 2014/3 42,000 3,600

Million

$/€

Terex Material Handling &

Port Solutions AG 2013/9 1,300 130

Konecranes Oyj 2014/3 2,212 146

Columbus McKinnon Corp. 2014/3 606 57

(Source) Created by JPR from FactSet. Kito and Terex Material Handling & Port Solutions AG are company’s

planned figures. Konecranes Oyj and Columbus McKinnon Corp. are share analyst consensus figures

calculated by FactSet.

Although there is no competition in the price and performance in the high-quality segment in

Japan; globally, Konecranes Oyj (Finland), Terex Material Handling & Port Solutions AG

(previously Demag Cranes AG, Germany) and Columbus McKinnon Corp. (USA) are competitor

companies. These companies used to have their own specialized segments according to product

features or regions: Kito Corporation on high-quality hoists, Konecranes on cranes, Demag on the

European markets, and Columbus on the US market. However, while Kito and Konecranes

became business affiliates and promoted global expansion, the expected risks of the expansion of

direct competition among global companies and major changes in the competition environment

caused fiercer competition in price. As Kito Corporation is the smallest in scale, improvement of

corporate strength by scale expansion will be important to survive in the global price competition.

Evaluation of Business Model

Evaluation from External

Environment



14/29





of the company.

Sources of company’s

strength are high entry barrier

and strong customer

relationships

Steady changes in basic

mechanical technology

Leading companies have

strong “leaning effect” in

which various know-how to

strengthen competitiveness,

knowledge and management

resources increase

cumulatively.

Once company establishes

leading position, market

share is not easily reversed.

As for the threats from Chinese companies, Kito Corporation can surmount these by utilizing its

technically innovative main products to handle sophisticated customer needs in advance and lead

the world with its technical innovations and continue to build strong relationships with its

customers. Also, these are the products for which safety is crucial. Therefore, in order to increase

production efficiency, products are required to be trouble-proof, and a system is needed to provide

a substitute quickly when trouble occurs. Not only price, but also general factors of quality and

after-sale services, can affect customers’ judgment. These are tough barriers which Chinese

companies would have to surmount in order to successfully compete in the industry.

■Logic of high-profitable company structure from 5-force analysis

5-force analysis revealed that the sources of the company’s strength are a high entry barrier and

strong customer relationships. The basic mechanical technology of the products has hardly

changed since the products were first made, but the quality improvement has been promoted by

progressive changes. In the products which went through such technological changes, the

company with a large market share and strong customer relationships does not easily lose its

market share because it has a strong “learning effect” in which various know-how to strengthen

competitiveness, knowledge, and management resources increase cumulatively. Focusing on

high-quality and highly functional products, Kito Corporation has succeeded in strengthening this

learning effect. Although the company’s products are well known in Japan, these products still

have a growth potential as industrialization progresses globally. In the “Boston Matrix”, a

well-known management analysis tool, the products are always “stars” (products with high growth

potential in a fast-growing market).

Chart 16: 5-Force Analysis

First Force: High Entry Barrier

· Imitating manufacture know-how of manufacturing high-quality products which company

has developed from chain materials is difficult, and brand image will make it difficult for

newcomers to enter market/Products need to be high quality and highly reliable, and

because of PL risk, entering market is not easy.

Second Force: Strong Customer Relationships

· Stable technology allows customers to build strong relationship with company once

product is bought/Especially in area where high reliability and quality are required, when

switching to different manufacturer’s products can be costly.

Third Force: Limited Price Competitions

· Relatively small numbers of competitor companies in industry/Not much competition in

lowering price dramatically/Clear differentiation possible by quality

Fourth Force: Small Alternative Risk

· Low alternative risk for hoists in material handling market

Fifth Force: Good Relationship with Suppliers

· Established good relationship with suppliers (materials and electric components)

· Stronger negotiating power by expanding market share


Evaluation from 5-Force

Analysis



15/29





of the company.

Differentiated values,

rareness, and imitation

difficulty. Strength is

corporate philosophy which

takes root as company’s

organizational culture.

Promote market penetration

by creating new segment in

market and setting target

customers

This is a business model which is going to have a significant cost in advance until the market

share is built, but once it is established, will increase the company’s profit by the operating

leverage effect. The company aims to achieve an ideal situation in the 5-forces in all main global

markets. By achieving this, the company will enjoy long lasting high profitability.

■Management resource evaluation from VRIO Analysis

The VRIO Analysis, a framework used to analyze a company’s management resources, shows that

the management resources of Kito Corporation are of high value.

Chart 17: VRIO Analysis

Differentiated Value (Value)

· Provide clearly differentiated products and services in price and performance in hoist

market with features “Safety”, “Durability” and “Usability”.

Rareness (Rareness)

· Built a brand which matches price and performance in “Safety”, “Durability” and

“Usability”, competition is limited globally.

Difficult to Imitate (Imitation)

· Company develops from chain materials. Difficult to imitate company’s products made by

combining high-quality mechanical parts.

Organization (Organization)

· Company’s business model based on corporate philosophy. Strength has been that business

model has taken root as culture in organization.


■Strategies of market segmentation and defining company’s position

Kito Corporation became a dominant leader in Japan by creating a new segment of high-quality

hoists in the market and by providing differentiated products. Globally, the company also

penetrated the market against large-scale global companies by creating the same segment in the

market. In the USA, Columbus McKinnon has been the dominant leader; but Kito increased its

market share by focusing on the high-quality segment and the Japanese way of providing detailed

services including quick delivery. In China, although the products are standard, the company

obtained a leadership position via quick delivery and detailed services.

Chart 18: Summary of Marketing Strategies

In hoist and crane market which has four global companies and total sales of approximately

500 million yen, Kito Corporation created new segment of high-quality hoists

Target customers with highest demands of high-quality hoists

Established position attractive for target customers

Company made market penetration against large-scale global companies by implementing

differentiation strategies with high-quality hoists

(Source) Created by JPR.

Evaluation from VRIO

Analysis

Evaluation from

Marketing Strategies



16/29





of the company.

Promoting faultless strategies

to strengthen internal

management resources and

overcome weaknesses for

opportunities in external

environment and against

threats

■Promoting faultless strategies

Chart 19 shows the SWOT Analysis and the company’s strategies sorted into the four quadrants

(SW x OT = 2×2 = 4) which are inevitably lead by the analysis. It shows that the company’s

strategies are established exhaustively and faultlessly.

Chart 19: Cross SWOT Analysis

Intern

al Man

agem

ent

Reso

urce A

naly

sis

Strength

· High quality originally developed from chain materials/Strong brand image in

high-quality chain hoists/Inverter control technology/Strong customer

relationships/Leading position in Japan, USA, and China/Accumulated technology

Weakness

· Difficulty in optimization of global procurement due to small scale/Fixed expenses

in global sales system/small profit from services

Ex

ternal E

nviro

nm

ent A

naly

sis

Opportunities

· Room for high-quality products in developed countries/ Possibility of market share

increase by differentiation with high-quality wire rope hoists/ Needs in emerging

countries for high-quality hoists due to industrialization/Demand for infrastructure

reconstruction in Japan/Higher awareness of safety and increased customer

complaints (positive element for company’s high-quality and reliable products)

Threats

· Fiercer head-to-head competition among global companies which used to have

own segments

· Entry of low-price products by Chinese companies

Strateg

ies After In

ternal M

anag

emen

t and

Ex

ternal E

nv

iron

men

t An

alyses

Grab Opportunities Utilizing Strength (S×O)

· Further improvement of main products/Applying Kito’s quality improvement

strategies on accessories for wire rope hoists and cranes/Increase market share in

Japan, USA, and China by implementing above strategy, adapting to growth in

emerging countries/Strengthen safety education activities/Support reliability for

high quality while strengthening capability of customer complaint

response/Expanding service-based business/Expanding parts sales by strengthening

ability to make proposals

Face Threats Utilizing Strength (S×T)

· Faster cycle of new product development to maintain and strengthen company’s

position in Japan, USA, and China/Develop products ahead of customers’

needs/Maintain overall differentiation in QCD/Maintain differentiation through

uninterrupted technological innovations

Grab Opportunities by Overcoming Weakness (W×O)

· Growth by limiting new investments through productivity improvement/Optimize

global procurement by expanding business scale/Cost control and better business

efficiency by optimum global distribution of resources/Strengthen customer

relations by improving service-based business/Fight against Chinese products by

expanding fine-tuned services in service-based business

Face Threats by Overcoming Weakness (W×T)

· Establish management system to maintain relative competitive superiorities by

constantly analyzing movement of competitor companies/Establish management

system to promote ceaseless efficiency with effective global operations


Evaluation from Cross

SWOT Analysis



17/29





of the company.

Cash flow diminished

because company placed

priority in business

expansion, causing low

financial stability and asset

efficiency.

Profit ratios and growth

produce results.

In future, keys for success are

(1) to move from advance

investment stage to recovery

period, (2) to construct

suitable production system by

utilizing operating leverage

effect and promoting local

production for local

consumption, and (3) to move

to cycle to improve asset

efficiency by inventory

compression.

■Although foregoing cost of globalization, Kito Corporation is delivering steady results

Chart 20 shows a summary of the company’s financial performance of the past five years.

Chart 20: Summary of Financial Performance of Past Five Years

(Units: million yen, days, times, %)

Evaluation Item 2009/03 2010/03 2011/03 2012/03 2013/03

Gro

wth

Sales Growth -11.8 -26.6 17.4 18.5 6.7

Gross Profit Growth -26.0 -29.6 19.0 16.7 16.4

Operating Profit Growth -56.3 -81.5 156.1 48.2 51.4

Pro

fit R

atios

Gross Profit on Sales Ratio 31.2 30.0 30.4 29.9 32.7

Sales Administrative Expense Ratio 24.0 28.1 26.4 24.9 25.6

Operating Profit Ratio 7.3 1.8 4.0 5.0 7.1

Cap

ital Efficien

cy/R

eturn

on

C

apital

(Year E

nd

)

C a s h a n d D e p o s i t B a l a n c e T u r n o v e r P e r i o d 52.1 81.8 70.1 58.6 42.6

Trade Receivables Turnover Period 54.7 69.2 71.0 72.9 80.9

Inventory Turnover Period 77.0 86.1 83.3 93.9 103.7

Account Payables Turnover Period 50.8 51.6 66.4 67.0 50.9

Operating Capital Turnover Period 80.8 103.7 87.9 99.8 133.7

Tangible Assets Turnover Ratio 4.3 3.4 4.1 4.8 4.2

Profit for the Year Ratio 3.6 0.5 1.5 2.0 2.9

Total Assets Turnover Ratio 1.17 0.93 1.00 1.06 1.02

Leverage 1.66 1.68 1.85 2.05 2.00

ROE 7.1 0.8 2.8 4.3 5.9

ROA 8.5 1.7 4.0 5.3 7.2

Free C

ash F

low

for

Co

rporate V

alue

Calcu

lation

NOPAT (1) = Operating Profit x (1 – Effective Tax Rate)

1,196 129 442 694 1,074

Increase in Operating Capital (2) 510 -423 -32 2,338 3,901

Depreciation Expenses 1,343 1,108 1,013 944 774

Capital Investment 971 733 1,021 1,145 1,520

Net Capital Investment (3) -372 -375 8 201 746

Amortization of Goodwill (4) 0 114 131 159 155

Free Cash Flow = (1) – (2) – (3) + (4)

1,058 1,041 597 -1,686 -3,418

Fin

ancial

Stab

ility

Shareholders’ Equity Ratio 60.2 59.4 53.9 48.7 50.0

Gross D/E Ratio 0.103 0.161 0.179 0.265 0.310

Net D/E Ratio -0.175 -0.190 -0.176 -0.084 0.072

(Source) Created by JPR from Kito Corporation's short financial reports.

(Note) Turnover periods, ROE and ROA are end-of-year values. NOPAT is concept for calculation of

operating profit after tax and corporate value. Figures in above free cash flow do not match those on

company’s short financial reports because special concept for corporate value calculation was used.

Growth potential: With the March, 2010 period as the lowest, although Kito Corporation lost its

vigor in the March, 2013 period, the company succeeded in achieving a smooth business

expansion with continuous profit increase for the last three years. The profit growth largely

exceeded the sales growth due to an operating leverage effect.

Profit ratio: The gross profit on sales ratio reached its highest in the last five years. The operating

profit ratio was also the highest in the last five years, same as in the March, 2009 period. The

operating leverage effect must have had an impact on the expansion of the business.

Capital efficiency and return on capital：The operating capital turnover period is currently

increasing. Inventory investment and easing up payment conditions to acquire customers in the

global market created a slightly lower level of efficiency. The company has been conducting more

investment than depreciation expenses for the last two years. Compared to the March, 2009

period, the total asset turnover ratio dropped from 1.17 times to 1.02 times. However, improved

profit ratio kept ROE and ROA as the second best after the March, 2009 period for the last five

years. Improving the asset turnover ratio is the key to further improvement of ROE and ROA.

Evaluation of Financial

Performance



18/29





of the company.

Growth potential is currently

higher than company’s

Midterm Management Plan.

Free cash flow: Over the last two years, free cash flow has been negative due to an increase in

operating capital and net capital investment.

Financial stability: Due to negative cash flow, the D/E ratio increased to 0.31%. The net D/E

ratio is also deteriorating, with a positive figure in the March, 2013 period.

Overall evaluation: In order to promote business expansion, the company’s cash flow kept

dwindling, causing lower financial stability and asset efficiency; but profit ratios and sales growth

are producing results. In the future, the keys for success are (1) to move from the advance

investment stage to the recovery period, (2) to construct a suitable production system by utilizing

the operating leverage effect and promoting local production for local consumption, and (3) to

move to a cycle to improve asset efficiency by inventory compression. Judging from the

company’s management strategies, appropriate solutions are being applied.

■ Growth potential is currently higher than company’s Midterm Management Plan

Chart 21 shows a comparison of the forecast of the hoist and crane markets in each area in the

Midterm Management Plan, which was established in 2009, and of the actual sales growth in the

Japanese yen base between the March, 2009 period and the March, 2013 period by yearly average

conversion. Except in China (where the demand dropped temporary due to a Senkaku Islands

dispute) and in Europe with the euro crisis, growth is exceeding the forecast. Because growth is

exceeding the forecast in the matured markets of Japan and the USA, the company will most

assuredly increase its market share. Chart 22 shows the sales at the breakeven point estimated by

JPR, the sales growth, and the operating profit growth. When net sales grows above the breakeven

point, the operating profit growth will significantly exceed the sales growth. The company

implemented its strategy of controlling fixed expenses to achieve growth. By maintaining the

operating leverage effect, profit growths higher than sales growth can be expected in the future.

Chart 21: Growth Forecast at Midterm Management Plan and Actual Performance

(Source) Created by JPR from the information provided by Kito Corporation.

Chart 22: Sales at Estimated Breakeven Point (25 billion yen), Sales Growth and Operating Profit Growth

(Source) Created by JPR from information provided by Kito Corporation. Breakeven point was estimated by

JPR.

4.5%12.2% 4.3%

13.5%4.1%

12.7%

-0.5%

5.5%

39.6%

3.8%

-5%

15%

35%

55%

北米中国日本中国、日本を

除くアジア

欧州

2009年中期経営計画会社説明会資料における会社見通し（年平均）

2009年３月期から2013年３月期までの実績成長率（年平均）

North

AmericaChina Japan EuropeRest of Asia

(100)

(50)

0

50

100

150

200

0

10,000

20,000

30,000

40,000

09/03 10/03 11/03 12/03 13/03

%Million yen

推計分岐点売上高売上高売上高成長率

売上総利益成長率営業利益成長率

Sales at estimated breakeven point

Gross profit growth rate

Sales

Oerating profit growth rate

Sales growth rate

Evaluation of Growth

Potential

The company's forecast from the 2009 Midterm Management Plan (annual average)

Actual growth between FY 2009 and FY 2013 (annual average)



19/29





of the company.

Large scale profit ratio

improvement with operating

leverage worth noting

Negative cash flow due to

advanced investment

■Review of March 2013, period

Sales growth: Kito Corporation and its subsidiaries in the USA, Japan, and all Asian countries

except China lead the growth. The group’s growth in China was lower than expected. Overall,

the sales growth increased steadily under a severe economic environment, but the sales growth

was 6.7% compared to the previous year and below the growth target of 15% in the Midterm

Management Plan.

Profit growth and profit ratio: The operating profit increased greatly by 54.0% from the

previous year. Except for fluctuations in foreign exchange, the level was restored to that before

the Lehman Shock. The operating profit ratio was 7.1% and recovered to the second highest

since 7.3% of the March, 2009 period.

Asset effectiveness: Although the company adjusted its production in accordance with increased

bill transactions in China and a demand drop in the second half of the year in the USA, the

action was too late and resulted in increased inventory and a longer operating capital turnover

period. The capital investment was much higher than depreciation expenses, and the net cash

flow deteriorated.

Chart 23: Review of March 2013, Period and Company’s Plan for This Period

(Unit: million yen, day, times)

Actual Actual Planned

2012/03 2013/03 2014/03

Estimated Exchange Rate against USD 79.0 83.1 90.0

Net Sales 33,282 35,501 42,000

Japan 10,949 11,679 12,800

USA 8,851 10,163 11,800

China 7,745 6,994 8,300

Rest of Asia 3,608 4,626 6,600

Europe 1,255 1,286 1,500

Other areas 872 749 1,000

(Year-on-Year)

Net Sales 18.5% 6.7% 18.3%

Japan 15.5% 6.7% 9.6%

USA 20.6% 14.8% 16.1%

China 10.3% -9.7% 18.7%

Rest of Asia 87.1% 28.2% 42.7%

Europe 3.5% 2.5% 16.6%

Other areas -14.3% -14.1% 33.5%

Gross Profit on Sales 9,958 11,595 -

Sales Administrative Expenses 8,300 9,085 -

Operating Profit 1,658 2,510 3,600

Ordinary Profit 1,572 2,440 3,300

End-of-Year Profit 662 1,023 1,900

Sales Growth 18.5 6.7 18.3

Operating Profit Growth 48.2 51.4 43.4

Gross Profit on Sales Ratio 29.9 32.7 -

Sales Administrative Expense Ratio 24.9 25.6 -

Operating Profit Ratio 5.0 7.1 8.6

Trade Receivable Turnover Period (day) 71.0 72.9 80.9

Inventory Turnover Period (day) 83.3 93.9 103.7

Account Payables Turnover Period (day) 66.4 67.0 50.9

Operating Capital Turnover Period (day) 87.9 99.8 133.7

Tangible Assets Turnover Ratio 4.132 4.849 4.164

ROE 4.3% 6.3% Approx.12

%

Capital Investment 1,145 1,520 3,000

Depreciation Expenses 994 774 1,200

(Source) Created by JPR from the information provided by Kito Corporation. The turnover periods, turnover

ratio and ROE are the end-of-year values.

Review of March, 2013 Financial Results and Forecast of Current Period

Review of March, 2013

Period



20/29





of the company.

Growth higher than March,

2013 period

Operating leverage effect will

continue, and large increase

in profit due to favorable

foreign exchange

ROE will improve greatly

from 6.3% in March, 2013

period to 12%

Steady implementation of

strategies in four areas

■Forecast of March 2014 period

High net sales growth: In Japan, a demand increase is expected from this summer due to an

active financial initiative. Private capital investment is also expected to slowly expand due to a

weak yen. The company will endeavor to expand its market share by introducing new products.

Overseas, the company will continue to expand its business globally by implementing its area

specified strategies, which will lead to record-high net sales.

Profit growth/Profit ratio: With the continuous operating leverage effect and correction of the

strong yen level, a large increase in profit is expected. The operating profit ratio will be 8.6%, an

increase of 1.5% from 7.1% in the previous year.

Asset effectiveness: The operation capital which accumulated in the previous period will be

reduced by inventory compression. The company aims to improve ROE greatly from 6.3% in the

March, 2013 period to 12% by improvement in asset effectiveness and profit ratio.

■Steady implementation of strategies

The following chart shows the detail of the four strategies under implementation from the

March, 2013 period to the March, 2014 period. The four strategies have been implemented

exhaustively.

Chart 24: Update of Strategies between March, 2013 Period and March, 2014 Period

Area Strategy Product Strategy

USA: Market share expansion strategy

steadily progressing

Asia (excluding Japan and China): Business

expanding with Japanese companies. Slow in

Korea.

Indonesia: Newly established subsidiary

now ready will start taking orders

Taiwan: joint company established. Planned

expansion of existing business and planned

start of crane business.

China: Downturn of economy stopped

group’s growth strategy.

Expansion of wire rope hoist sales:

constructive sales activities will be

conducted in USA and Japan

Manufacturing Strategy Promotional Strategy

Thailand and Korea: Strengthen group’s

production capability by operating new crane

factory.

Global manufacturing.

Production transfer to USA

Promote local production for local

consumption for some products

Improve customer service in Thailand and

Korea.


■Review of first quarter of March, 2014 period

Growth in net sales: The net sales were 7,996 million yen, with an increase of 7.6% from the

Forecast of the March

2014 Period

Review of Strategies



21/29





of the company.

Steady progress toward

achieving annual company

plan

Gross profit ratio

same period last year. This consisted of 20% of the 4.2 billion yen of the March, 2014 company

plan. The net sales of the first quarter last year were 7,430 million yen, which were 20% of the

company’s annual net sales of 3.5501 billion yen; therefore, it is progressing at the same rate as

the same period last year. It was a favorable result toward fulfilling the company plan. Although

increases in the USA, Asia and Europe were double digits or more, the weak growth in private

demand in Japan -- while there was a steady public demand for construction and excavation --

caused a decrease in revenue. In addition, due to slow economic growth in China, it remained at

a single digit growth.

Profit growth and profit ratio: Compared to the same period last year, the operating profit and

the ordinary profit increased 158.9% and 1,300.0% respectively; and the profit for the period

became positive. The gross profit ratio increased greatly from 31.1% in the same period last year

to 36.2%, due to a favorable exchange rate. This was the highest rate since the first quarter of the

March, 2009 period when 1 USD was at the 100 yen level (Chart 26). The effect of increases

both in sales and profits, with a rise in profit ratio from the leverage effect of business scale

expansion, is shown here.

Chart 25: Financial Review of First Quarter of March, 2014 Period

(Unit: million yen)

Actual Planned

2013/3 First Quarter

2014/3 First Quarter 2014/3

Against Net

Sales Against Net Sales

Year-on-Year

Increase

Year-on-Year

Increase Rate

Net Sales 7,430 100.0% 7,996 100.0% 566 7.6% 42,000

Japan 2,460 33.1% 2,306 30.5% -154 -6.3% 12,800

USA 2,326 31.3% 2,822 28.1% 496 21.3% 11,800

China 1,528 20.6% 1,595 19.8% 66 4.3% 8,300

Rest of Asia 611 8.2% 702 15.7% 91 14.9% 6,600

Europe 335 4.5% 379 3.6% 44 13.１% 1,500

Other Areas 167 2.2% 190 2.3% 22 13.8% 1,000

Gross Profit on Sales 2,311 31.1% 2,899 36.2% 588 25.4% -

Sales Administrative Expenses 2,171 29.2% 2,539 31.7% 368 16.9% -

Operating Profit 139 1.9% 360 4.5% 221 158.9% 3,600

Ordinary Profit 30 0.4% 420 5.2% 390 1300.0% 3,300

End-or-year Profit -59 0.8% 230 2.8% 171 289.8% 1,900


Chart 26: Changes in Exchange Rate and Gross Profit Ratio

(Source) Created by JPR from information provided by Kito Corporation and FactSet.

25

30

35

40

45

50

70

80

90

100

110

120

130

2007/3 2008/3 2009/3 2010/3 2011/3 2012/3 2013/3

Gross

Profit

Ratio

Yen-USD

Exchange

Rate

Estimated

Yen-USD

ExchangeRate

円ドル為替レート（左目盛）当社想定為替レート（左目盛）

当社売上総利益率（右目盛）

Yen-USD exchange rate (left scale) Estimated exchange rate (left scale)

Gross profit rate (right scale)

Review of First Quarter

of March, 2014 Period



22/29





of the company.

Average financial

performance

PER is within lowest 25%

and level does not seem to

have included future benefit

of operating leverage effect

■Low valuation within Machinery Sector with net sales between 25 billion to 75 billion yen

Below is the chart which shows a comparison of actual sales between 25 and 75 billion yen from

listed companies of a similar size to Kito Corporation. Although Kito’s operating profit ratio,

ROE, and ROA were average, PER was in the lowest 25%. It does not appear that the level of

profit growth from the operating leverage effect was taken into consideration.

Chart 27: Machinery Sector of Net Sales of 25 Billion to 75 Billion Yen Security Code

Company Name Financial Period

Planned Dividend Yield

Planned PER

PBR of Preceding Period

Actual Operating Profit % of Last Period

Actual ROE of Last Period

Actual ROA of Last Period

1909 Nippon Dry-Chemical Mar. 2013 2.9% 7.5 1.15 5.6% 14.7% 7.8%

1978 Daiki Ataka Engineering Mar. 2013 1.2% 35.2 1.50 2.2% 3.6% 2.3%

6101 Tsugami Mar. 2013 2.6% 10.7 1.04 16.0% 13.1% 18.4%

6118 Aida Engineering Mar. 2013 2.5% 11.8 0.92 6.5% 7.2% 4.6%

6134 Fuji Machine MFG Mar. 2013 1.7% 21.3 0.77 6.1% 2.3% 3.0%

6137 Koike Sanso Kogyo Mar. 2013 2.6% 11.1 0.41 2.9% 4.4% 2.4%

6140 Asahi Diamond Industrial Mar. 2013 2.1% 16.4 1.08 11.9% 6.6% 7.4%

6143 Sodick Mar. 2013 3.1% 7.2 0.61 7.3% 11.6% 4.2%

6151 Nitto Kohki Mar. 2013 1.9% 16.2 0.94 13.0% 7.0% 7.0%

6165 Punch Industry Mar. 2013 3.2% 6.2 0.54 2.8% 3.7% 3.4%

6217 Tsudakoma Nov. 2012 0.0% 19.0 0.72 -5.3% -11.6% -5.0%

6218 Enshu Mar. 2013 0.0% 6.8 1.28 7.5% 29.2% 6.2%

6222 Shima Seiki MFG Mar. 2013 1.5% 17.2 0.76 1.7% 2.0% 0.5%

6249 Gamecard-Joyco Holdings Mar. 2013 3.9% 127.4 0.52 6.8% 3.8% 4.1%

6256 NuFlare Technology Mar. 2013 0.9% 13.9 4.87 41.4% 33.6% 29.5%

6257 Fujishoji Mar. 2013 0.0% 7.7 0.66 13.3% 6.8% 11.4%

6258 Hirata Mar. 2013 2.5% 17.8 0.29 1.2% 1.6% 0.8%

6277 Hosokawa Micron Sep. 2012 1.8% 10.8 1.08 9.6% 10.7% 9.2%

6281 Maeda Seisakusho Mar. 2013 1.9% 8.8 0.83 2.6% 11.0% 2.9%

6282 Oiles Mar. 2013 1.8% 16.0 1.20 9.0% 6.6% 7.5%

6286 Seiko Mar. 2013 3.0% 13.7 0.28 2.7% 3.6% 3.9%

6293 Nissei Plastic Industrial Mar. 2013 1.3% 9.6 0.53 4.8% 7.8% 3.7%

6299 Kobelco Eco-Solution Mar. 2013 1.4% 48.5 2.83 5.5% 12.4% 7.0%

6306 Nikko Mar. 2013 1.8% 26.6 0.65 4.4% 3.6% 3.2%

6309 Tomoe Engineering Oct. 2012 3.1% 14.4 0.63 5.9% 7.2% 7.2%

6316 Maruyama MFG Sep. 2012 1.2% 23.0 0.94 4.7% 4.5% 4.7%

6317 Kitagawa Iron Works Mar. 2013 1.6% 19.5 0.63 2.4% 6.6% 1.9%

6328 Ebara Jitsugyo Dec. 2012 3.1% 12.1 1.11 3.7% 19.8% 5.0%

6331 Mitsubishi Kakoki Mar. 2013 0.0% 52.2 0.69 -2.5% -5.1% -2.5%

6340 Shibuya Kogyo Jun. 2013 0.5% 20.5 1.99 4.7% 5.7% 4.1%

6345 Aichi Corporation Mar. 2013 2.0% 21.6 0.90 6.4% 3.9% 4.1%

6349 Komori Corporation Mar. 2013 0.8% 27.3 0.67 0.8% -1.7% 0.4%

6351 Tsurumi Manufacturing Mar. 2013 1.7% 12.9 0.57 8.2% 5.9% 5.6%

6355 Sumitomo Precision Products Mar. 2013 1.7% 54.0 0.66 1.1% 0.8% 0.6%

6363 Torishima Pump MFG Mar. 2013 1.9% 38.5 0.82 1.4% 2.9% 1.0%

6364 Hokuetsu Industries Mar. 2013 3.7% 7.2 0.59 5.4% 9.5% 5.7%

6368 Organo Mar. 2013 2.5% 18.7 0.64 5.2% 5.7% 4.1%

6369 Toyo Kanetsu Mar. 2013 1.5% 21.5 1.04 5.0% 5.0% 3.9%

6373 Daido Kogyo Mar. 2013 1.2% 11.0 0.71 1.9% 4.4% 1.4%

6382 Trinity Industrial Mar. 2013 1.9% 16.4 0.36 1.8% 2.1% 1.9%

6390 Kato Works Mar. 2013 1.4% 15.1 0.91 3.5% 4.7% 2.4%

6393 Yuken Kogyo Mar. 2013 2.3% 15.3 0.74 3.7% 4.3% 2.9%

6407 CKD Mar. 2013 1.8% 12.8 0.94 5.0% 4.8% 4.5%

6408 Ogura Clutch Mar. 2013 0.0% 9.2 0.34 0.7% 10.% 0.7%

6411 Nakano Refrigerators Dec. 2012 0.6% 7.0 0.67 15.2% 19.4% 16.8%

6419 Mars Engineering Mar. 2013 3.2% 8.6 0.77 21.0% 8.5% 10.8%

6420 Fukushima Industries Mar. 2013 0.8% 11.9 1.38 9.4% 12.1% 10.2%

6430 Daikoku Denki Mar. 2013 2.0% 14.6 0.97 11.9% 13.7% 12.4%

6432 Takeuchi MFG Mar. 2013 0.6% 15.8 1.05 3.4% 10.9% 2.7%

6445 Janome Sewing Machine Mar. 2013 0.0% 10.9 0.91 4.6% 0.6% 3.5%

6454 Max Mar. 2013 3.2% 18.6 0.92 7.0% 3.9% 4.8%

6458 Shinko Industries Mar. 2013 2.3% 6.9 0.93 13.8% 15.2% 10.6%

6461 Nippon Piston Ring Mar. 2013 3.2% 9.3 0.58 4.7% 9.4% 3.6%

6462 Riken Mar. 2013 3.1% 8.9 0.74 6.6% 7.3% 5.9%

6480 Nippon Thompson Mar. 2013 2.0% 16.0 0.67 3.3% -0.2% 1.4%

6489 Maezawa Industries May 2013 1.5% 13.1 0.49 4.0% 5.7% 3.4%

Maximum 3.9% 127.4 4.87 41.4% 33.6% 29.5%

Top 25% 2.5% 19.1 0.99 7.4% 9.8% 7.0%

Average 1.8% 18.8 0.92 6.3% 7.0% 5.2%

Median 1.8% 14.5 0.77 4.9% 5.7% 4.1%

Bottom 25% 1.2% 10.4 0.63 2.8% 3.6% 2.4%

Minimum 0.0% 0.3 0.25 -5.3% -11.6% -5.0%

6409 Mar. 2013 2.0% 10.0 1.09 7.1% 5.9% 7.2%

(Source) Created by JPR from FactSet. Share prices and total market cap were closing prices on September

9, 2013. (Note) ROE and ROA are end-of-period values.

Comparative Analysis of Comparable Companies, Total Market Price Analysis and Share Price Chart

Comparison within

Machinery Sector



23/29





of the company.

■Breakdown of total market value from theoretical relationship among PER, equity cost

and growth

The breakdown of PER is theoretically as follows:

The equity cost of Kito Corporation was estimated as 6.72% based on the share price returns

from June, 2011 to May, 2013 (beta value: 1.16, risk premium: around 5%). Putting these values

into the above formula, if the PER is 10.0 times the closing price base of September 9, 2013, the

growth is -3.58%. Considering the company’s past increase in operating profit ratio and the

future profit growth potential due to the continuous operating leverage effect, a negative growth

potential seems to be a low evaluation with an equity cost of 6.72%.

In theory, if the end-of-year profit of the March, 2014 period continues permanently, the

shareholder value will be “1.9 billion yen (End-of-year profit)/Equity Cost = 1.9 billion

yen/6.72% = 28.2 billion yen”. The total market price is currently 19.8 billion yen, and therefore,

“28.2 billion yen – 19.8 billion yen = 8.4 billion yen”, which is more than 30% lower than it

should be.

Chart 28: Share Price Chart of Past 100 Share Trading Days

(Source) Created by JPR from FactSet.

Analysis of Total

Market Value

PER＝

１

Equity Cost − Growth

Growth＝１

PER− Equity Cost＝6.72％−

１

10.0

＝6.72％− 10.0%＝− 3.28. %

800

1,000

1,200

1,400

1,600

1,800

2,000

130909

130905

130903

130830

130828

130826

130822

130820

130816

130814

130812

130808

130806

130802

130731

130729

130725

130723

130719

130717

130712

130710

130708

130704

130702

130628

130626

130624

130620

130618

130614

130612

130610

130606

130604

130531

130529

130527

130523

130521

130517

130515

130513

130509

130507

130501

130426

130424

130422

130418

円

2013/7/8

2013/7/4

2013/7/2

2013

/6/28

2013

/6/26

2013

/6/24

2013

/6/20

2013

/6/18

2013

/6/14

2013

/6/12

2013

/6/10

2013/6/6

2013/6/4

2013

/5/31

2013

/5/29

2013

/5/27

2013

/5/23

2013

/5/21

2013

/5/17

2013

/5/15

2013

/5/13

2013/5/9

2013/5/7

2013/5/1

2013

/4/26

2013

/4/24

2013

/4/22

2013

/4/18

2013

/4/16

2013

/4/12

2013

/4/10

2013/4/8

2013/4/4

2013/4/2

2013

/3/29

2013

/3/27

2013

/3/25

2013

/3/21

2013

/3/18

2013

/3/14

2013

/3/12

2013/3/8

2013/3/6

2013/3/4

2013

/2/28

2013

/2/26

2013

/2/22

2013

/2/20

2013

/2/18

2013

/2/14

2013

/2/12

75日移動平均25日移動平均5日移動平均終値+25日終値標準偏差終値-25日終値標準偏差終値+25日終値標準偏差x2終値-25日終値標準偏差x2

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,00075 days moving average

25 days moving average

5 days moving average

Closing price + 25 days standard deviation of closing price

Closing price - 25 days standard deviation of closing price

Closing price + 25 days standard deviation of closing price×2

Closing price - 25 days standard deviation of closing price×2



24/29





of the company.

■Conditions of cases

From interviews with Kito Corporation, a Discount Cash Flow (DCF) Analysis was conducted.

Calculations were based on the profit structure and assets turnover period of the March, 2013

period. Regarding the Residual Value Calculation, a calculation was made with an assumption that

the profits are all distributed. The Weighted Average Cost of Capital was set as 5.9%, which was

estimated from the last three years’ returns and from the structure of the current capital liabilities.

The DCF Analysis only shows theoretical shareholder value and is not always reflected by the

actual market cap. Please note that the analysis was conducted as a theoretical indication to

evaluate the company’s growth potential but does not guarantee an actual share price or market

cap. As a result, the shareholder value was calculated as follows:

■Case of achieving March, 2014 Plan, then becoming unchanged

The calculation was made assuming that Kito Corporation will achieve its company plan in the

March, 2014 period and will keep that profit standard after the March, 2015 period. As a result, the

shareholder value was calculated as 29.8 billion yen.

■Case of achieving Midterm Management Plan

The calculation was made assuming that Kito Corporation will achieve its Midterm Management

Plan. As a result, the shareholder value was calculated as 55.4 billion yen.

■Case of achieving Midterm Management Plan + operating leverage effect beginning to

show

The calculation was made assuming that Kito Corporation will achieve its Midterm Management

Plan and the operating leverage effect will be seen with the fixed expenses remaining at 110% of

the value calculated from past results. As a result, the shareholder value was calculated as 67.2

billion yen.

■Case of operating leverage effect only

The calculation was made assuming that the fixed expenses calculated based on the net sales of the

March, 2014 period will remain unchanged and the operating leverage effect will be seen. The net

sales and profits are assumed to remain unchanged from the March, 2015 period. As a result, the

shareholder value was calculated as 35.5 billion yen.

Reference: Case Analysis with DCF

DCF Case Analysis



25/29





of the company.

Actual Planned & Estimated Estimated Estimated Estimated Estimated Estimated Estimated

2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03 Residual Value

Net Sales 35,501 42,000 42,000 42,000 42,000 42,000 42,000 42,000 Gross Profit 11,607 13,520 13,520 13,520 13,520 13,520 13,520 13,520 Sales Administrative Expense 9,097 9,920 9,920 9,920 9,920 9,920 9,920 9,920 Operating Profit 2,510 3,600 3,600 3,600 3,600 3,600 3,600 3,600 Interest Paid 101 92 49 16 0 0 0 0 Interest Paid Ratio 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% Other Profit and Loss -299 -208 -208 -208 -208 -208 -208 -208 Ordinary Profit 2,440 3,300 3,342 3,376 3,392 3,392 3,392 3,392 Extraordinary Profit and Loss -128 0 0 0 0 0 0 0 Profit before Tax 2,312 3,300 3,342 3,376 3,392 3,392 3,392 3,392 Income Taxes Minority Shareholders’ Equity

1,146 143

1,314 71

1,304 71

1,317 71

1,323 71

1,323 71

1,323 71

1,323 71

Current Profit 1,023 1,900 1,968 1,988 1,998 1,998 1,998 1,998 Dividend 258 388 401 406 408 400 1,998 1,998 Dividend Ratio 25 20 20 20 20 20 100 100 Internal Reserves 765 1,512 1,566 1,583 1,590 1,598 0 0

Balance Sheet 2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03

Cash and Deposits 4,140 4,898 4,898 4,898 4,898 4,898 4,898 4,898 Trade Receivables 7,872 7,814 7,814 7,814 7,814 7,814 7,814 7,814 Inventory 10,088 9,027 9,027 9,027 9,027 9,027 9,027 9,027 Other Current Assets 1,675 1,675 1,675 1,675 1,675 1,675 1,675 1,675 Current Assets 23,775 23,415 23,415 23,877 25,539 27,208 27,279 27,350 Net Tangible Assets 8,526 10,087 10,196 10,087 10,087 10,087 10,087 10,087 Investments and Loans 139 139 139 139 139 139 139 139 Net Goodwill 489 334 179 0 0 0 0 0 Other Tangible Assets 317 317 317 317 317 317 317 317 Other Assets 702 702 702 702 702 702 702 702 Deferred Tax Assets 11 7 3 0 0 0 0 0 Other Assets 801 801 801 801 801 801 801 801 Total Assets 34,760 35,801 35,751 35,923 37,585 39,254 39,325 39,396 Accounts Payables 4,955 6,749 6,749 6,749 6,749 6,749 6,749 6,749 Interest-bearing Liabilities 5,505 3,169 1,482 0 0 0 0 0 Other Liabilities 6,288 6,288 6,288 6,288 6,288 6,288 6,288 6,288 Minor Shareholders’ Equity 649 720 791 862 933 1,004 1,075 1,146 Equity 17,363 18,875 20,442 22,025 23,615 25,213 25,213 25,213 Capital and Liabilities 34,760 35,801 35,751 35,923 37,585 39,254 39,325 39,396 Sales Growth Ratio Gross Profit on Sales Ratio Sales Administrative Expense Ratio Operating Profit Ratio Effective Tax Ratio Dividend Ratio

6.7% 32.7% 25.6% 7.1%

49.6% 25.0%

18.3% 32.2% 23.6% 8.6%

40.0% 20%

0.0% 32.2% 23.6% 8.6%

39.0% 20.0%

0.0% 32.2% 23.6% 8.6%

39.0% 20.0%

0.0% 32.2% 23.6% 8.6%

39.0% 20.0%

0.0% 32.2% 23.6% 8.6%

39.0% 20.0%

0.0% 32.2% 23.6% 8.6%

39.0% 100.0%

0.0% 32.2% 23.6% 8.6%

39.0% 100.0%

Cash and Deposit Balance Turnover Period (days) Trade Receivables Turnover Period (days) Inventory Turnover Period (days) Account Payables Turnover Period (days) Operating Capital Turnover Period (days) Tangible Assets Turnover Ratio (times)

43.0 80.9

103.7 50.9

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

43.0 67.9 78.5 58.6

133.7 4.16

Gross D/E Ratio 0.317 0.317 0.317 0.317 0.317 0.317 0.317 0.317 ROE 5.9% 10.0% 9.6% 9.0% 8.5% 7.9% 7.9% 7.9% Profit for the Year Ratio 2.9% 4.5% 4.7% 4.7% 4.8% 4.8% 4.8% 4.8% Total Assets Turnover Ratio 1.0 1.2 1.2 1.2 1.1 1.1 1.1 1.1 Leverage 2.0 1.9 1.7 1.6 1.6 1.6 1.6 1.6 Shareholders’ Equity Ratio 50.0% 52.7% 57.2% 61.3% 62.8% 64.2% 64.1% 64.0% NOPAT (1) 1,074

3,901 774

1,955 -2,192 1,200

1,998 0

1,291

1,998 0

1,304

1,998 0

1,316

1,998 0

1,326

1,998 0

1,331

1,998 0

1,331

Increase in Operating Capital (2) Depreciation Expenses Capital Investment Net Capital Investment (3)

1,520 746

3,000 1,800

1,400 109

1,400 -109

1,400 0

1,400 0

1,331 0

1,331 0

Amortization of Goodwill (4) 155 155 155 179 0 0 0 0 (Depreciation Expenses Ratio) 10.2% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Free Cash flow (1) – (2) – (3) + (4) -3,418 3,222 2,043 1,997 1,997 1,997 1,997 1,997 33,867 Discount Factor 0.94 0.89 0.84 0.80 0.75 0.71 0.67 0.67 PV 3,043 1,823 1,925 1,589 1,500 1,416 1,3.8 22,674 EPS (yen) 79 147 152 154 155 155 155 155 DPS (yen) 20 30 31 31 32 31 155 155 BPS (yen) 1,344 1,461 1,582 1,705 1,828 1,952 1,952 1,952 Outstanding Shares (million) 12.920 12.920 12.920 12.920 12.920 12.920 12.920 12.920 Estimated Cost of Shareholders’ Equity 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% ROE/Estimated Cost of Shareholders Equity 0.9 1.5 1.4 1.4 1.3 1.2 1.2 1.2

NPV (Total of PVs) 35,307 Interest-bearing Liabilities 5,505 Shareholder Value 29,802

(Source) Created by JPR. For the period ending March, 2014, the figures for Sales, Operating Income, Ordinary

Income, Current Profit, Purchase Cost of Investment Properties, and End-of-period Investment Property

Inventory Balance were taken from information disclosed by Kito Corporation; other figures are JPR's estimation. The outstanding shares exclude treasury shares.

Reference: Case Analysis with DCF

Case of Achieving Goal

of March, 2014 Plan,

then Unchanged

(Unit: million yen otherwise specified)



26/29





of the company.


2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03 Residual Value


1,146 143

1,314 71

1,951 71

2,599 71

2,607 71

2,694 71

2,648 71

2,649 71


Balance Sheet 2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03

Cash and Deposits 4,140 4,898 5,831 6,764 6,764 6,764 6,764 6,764 Trade Receivables 7,872 7,814 9,303 10,791 10,791 10,791 10,791 10,791 Inventory 10,088 9,027 10,747 12,466 12,466 12,466 12,466 12,466 Other Current Assets 1,675 1,675 1,675 1,675 1,675 1,675 1,675 1,675 Current Assets 23,775 23,415 27,555 31,696 31,696 31,696 31,696 31,721 Net Tangible Assets 8,526 10,087 12,008 13,929 13,929 13,929 13,929 13,929 Investments and Loans 139 139 139 139 139 139 139 139 Net Goodwill 489 334 179 0 0 0 0 0 Other Tangible Assets 317 317 317 317 317 317 317 317 Other Assets 702 702 702 702 702 702 702 702 Deferred Tax Assets 11 7 3 0 0 0 0 0 Other Assets 801 801 801 801 801 801 801 801 Total Assets 34,760 35,801 41,704 47,585 47,585 47,585 47,585 47,609 Accounts Payables 4,955 6,749 8,034 9,320 9,320 9,320 9,320 9,320 Interest-bearing Liabilities 5,505 3,169 5,344 6,688 3,428 117 46 0 Other Liabilities 6,288 6,288 6,288 6,288 6,288 6,288 6,288 6,288 Minor Shareholders’ Equity 649 720 791 862 933 1,004 1,075 1,146 Equity 17,363 18,875 21,248 24,427 27,616 30,856 30,856 30,856 Capital and Liabilities 34,760 35,801 41,704 47,585 47,585 47,585 47,585 47,609 Sales Growth Ratio Gross Profit on Sales Ratio Sales Administrative Expense Ratio Operating Profit Ratio Effective Tax Ratio Dividend Ratio

6.7% 32.7% 25.6% 7.1%

49.6% 25.0%

18.3% 32.2% 23.6% 8.6%

40.0% 20.0%

19.0% 32.6% 22.0% 10.6% 39.0% 20.0%

16.0% 32.8% 20.7% 12.1% 39.0% 20.0%

0.0% 32.8% 20.7% 12.1% 39.0% 20.0%

0.0% 32.8% 20.7% 12.1% 39.0% 20.0%

0.0% 32.8% 20.7% 12.1% 39.0%

100.0%

0.0% 32.8% 20.7% 12.1% 39.0%

100.0%


43 80.9

103.7 50.9

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16


3,901 774

1,955 -2,192 1,200

3,035 1,922 1,291

4,072 1,922 1,304

4,072 0

1,316

4,072 0

1,326

4,072 0

1,331

4,072 0

1,331


1,520 746

3,000 1,800

1,400 1,921.3

1,400 1,921.3

1,400 0

1,400 0

1,331 0

1,331 0

Amortization of Goodwill (4) 155 155 155 179 0 0 0 0 (Depreciation Expenses Ratio) 10.2% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Free Cash flow (1) – (2) – (3) + (4) -3,418 3,222 -654 407 4,072 4,072 4,072 4,072 69,025 Discount Factor 0.94 0.89 0.84 0.80 0.75 0.71 0.67 0.67 PV 3,043 -583 343 3,238 3,057 2,887 2,726 46,213 EPS (yen) 79 147 231 309 310 313 315 315 DPS (yen) 20 30 47 63 63 63 315 315 BPS (yen) 1,344 1,461 1,645 1,891 2,138 2,388 2,388 2,388 Outstanding Shares (million) 12.920 12.92 12.92 12.92 12.92 12.92 12.92 12.92 Estimated Cost of Shareholders’ Equity 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% ROE/Estimated Cost of Shareholders Equity 0.9 1.5 2.1 2.5 2.2 2.0 2.0 2.0


(Source) Created by JPR. For the period ending March, 2014, the figures for Sales, Operating Income, Ordinary Income, Current Profit, Purchase Cost of Investment Properties, and End-of-period Investment Property

Inventory Balance were taken from information disclosed by Kito Corporation; other figures are JPR's

estimation. The outstanding shares exclude treasury shares.

Case of Achieving

Midterm Management

Plan




27/29





of the company.


2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03 Residual Value


1,146 143

1,314 71

2,309 71

3,086 71

3,098 71

3,122 71

3,129 71

3,129 71


Balance Sheet 2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03

Cash and Deposits 4,140 4,898 5,831 6,764 6,764 6,764 6,764 6,764 Trade Receivables 7,872 7,814 9,303 10,791 10,791 10,791 10,791 10,791 Inventory 10,088 9,027 10,747 12,466 12,466 12,466 12,466 12,466 Other Current Assets 1,675 1,675 1,675 1,675 1,675 1,675 1,675 1,675 Current Assets 23,775 23,415 27,555 31,696 31,696 33,852 33,923 33,995 Net Tangible Assets 8,526 10,087 12,008 13,929 13,929 13,929 13,929 13,929 Investments and Loans 139 139 139 139 139 139 139 139 Net Goodwill 489 334 179 0 0 0 0 0 Other Tangible Assets 317 317 317 317 317 317 317 317 Other Assets 702 702 702 702 702 702 702 702 Deferred Tax Assets 11 7 3 0 0 0 0 0 Other Assets 801 801 801 801 801 801 801 801 Total Assets 34,760 35,801 41,704 47,585 47,585 49,741 49,812 49,883 Accounts Payables 4,955 6,749 8,034 9,320 9,320 9,320 9,320 9,320 Interest-bearing Liabilities 5,505 3,169 4,897 5,636 1,764 0 0 0 Other Liabilities 6,288 6,288 6,288 6,288 6,288 6,288 6,288 6,288 Minor Shareholders’ Equity 649 720 791 862 933 1,004 1,075 1,146 Equity 17,363 18,875 21,694 25,479 29,280 33,129 33,129 33,129 Capital and Liabilities 34,760 35,801 41,704 47,585 47,585 49,741 49,812 49,883 Sales Growth Ratio Gross Profit on Sales Ratio Sales Administrative Expense Ratio Operating Profit Ratio Effective Tax Ratio Dividend Ratio

6.7% 32.7% 25.6% 7.1%

49.6% 25.0%

18.3% 0.0%

23.6% 8.6%

40.0% 20.0%

19.0% 32.0% 21.7% 12.4% 39.0% 20.0%

16.0% 32.7% 20.5% 14.2% 39.0% 20.0%

0.0% 32.7% 20.5% 14.2% 39.0% 20.0%

0.0% 32.7% 20.5% 14.2% 39.0% 20.0%

0.0% 32.7% 20.5% 14.2% 39.0%

100.0%

0.0% 32.7% 20.5% 14.2% 39.0%

100.0%


43 80.9

103.7 50.9

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16


3,901.0 774

1,955 -2,192.0

1,200

3,593 1,922.5

1,291

4,823 1,922.5

1,304

4,823 0.0

1,316

4,823 0.0

1,326

4,823 0.0

1,331

4,823 0.0

1,331


1,520 746

3,000 1,800

1,400 1,921.3

1,400 1,921.3

1,400 0.0

1,400 0.0

1,331 0.0

1,331 0.0

Amortization of Goodwill (4) 155 155 155 179 0 0 0 0 (Depreciation Expenses Ratio) 10.2% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Free Cash flow (1) – (2) – (3) + (4) -3,418 3,222 -96 1,158 4,823 4,823 4,823 4,823 81,757 Discount Factor 0.94 0.89 0.84 0.80 0.75 0.71 0.67 0.67 PV 3,043 -86 975 3,835 3,621 3,419 3,229 54,737 EPS (yen) 79 147 274 368 370 372 373 373 DPS (yen) 20 30 56 75 75 74 373 373 BPS (yen) 1,344 1,461 1,679 1,972 2,266 2,564 2,564 2,564 Outstanding Shares (million) 12.920 12.920 12.920 12.920 12.920 12.920 12.920 12.920 Estimated Cost of Shareholders’ Equity 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% ROE/Estimated Cost of Shareholders Equity 0.9 1.5 2.4 2.8 2.4 2.2 2.2 2.2





Case of Achieving

Midterm Management

Plan and Operating

Leverage




28/29





of the company.


2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03 Residual Value


1,146 143

1,314 71

1,538 71

1,551 71

1,556 71

1,556 71

1,556 71

1,556 71


Balance Sheet 2013/03 2014/03 2015/03 2016/03 2017/03 2018/03 2019/03 2020/03

Cash and Deposits 4,140 4,898 4,898 4,898 4,898 4,898 4,898 4,898 Trade Receivables 7,872 7,814 7,814 7,814 7,814 7,814 7,814 7,814 Inventory 10,088 9,027 9,027 9,027 9,027 9,027 9,027 9,027 Other Current Assets 1,675 1,675 1,675 1,675 1,675 1,675 1,675 1,675 Current Assets 23,775 23,415 23,415 24,462 26,414 28,375 28,446 28,517 Net Tangible Assets 8,526 10,087 10,087 10,087 10,087 10,087 10,087 10,087 Investments and Loans 139 139 139 139 139 139 139 139 Net Goodwill 489 334 179 0 0 0 0 0 Other Tangible Assets 317 317 317 317 317 317 317 317 Other Assets 702 702 702 702 702 702 702 702 Deferred Tax Assets 11 7 3 0 0 0 0 0 Other Assets 801 801 801 801 801 801 801 801 Total Assets 34,760 35,801 35,624 36,508 38,460 40,421 40,492 40,563 Accounts Payables 4,955 6,749 6,749 6,749 6,749 6,749 6,749 6,749 Interest-bearing Liabilities 5,505 3,169 1,080 0 0 0 0 0 Other Liabilities 6,288 6,288 6,288 6,288 6,288 6,288 6,288 6,288 Minor Shareholders’ Equity 649 720 791 862 933 1,004 1,075 1,146 Equity 17,363 18,875 20,734 22,609 24,490 26,380 26,380 26.380 Capital and Liabilities 34,760 35,801 35,642 36,508 38,460 40,421 40,492 40,563 Sales Growth Ratio Gross Profit on Sales Ratio Sales Administrative Expense Ratio Operating Profit Ratio Effective Tax Ratio Dividend Ratio

6.7% 32.7% 25.6% 7.1%

49.6% 25.0%

18.3% 0.0%

23.6% 8.6%

40.0% 20.0%

0.0% 31.1% 23.3% 10.0% 39.0% 20.0%

0.0% 31.1% 23.3% 10.0% 39.0% 20.0%

0.0% 31.1% 23.3% 10.0% 39.0% 20.0%

0.0% 31.1% 23.3% 10.0% 39.0% 20.0%

0.0% 31.1% 23.3% 10.0% 39.0%

100.0%

0.0% 31.1% 23.3% 10.0% 39.0%

100.0%

Cash and Deposit Balance Turnover Period (days) Trade Receivables Turnover Period (days) Inventory Turnover Period(days) Account Payables Turnover Period(days) Operating Capital Turnover Period(days) Tangible Assets Turnover Ratio(times)

43 80.9

103.7 50.9

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16

43 67.9 78.5 58.6

133.7 4.16


3,901.0 774

1,955 -2,192.0 1,200.0

2,363 0.0

1,291.1

2,363 0.0

1,304.1

2,363 0.0

1,315.6

2,363 0.0

1,325.7

2,363 0.0

1,330.5

2,363 0.0

1,330.5


1,520.0 746

3,000.0 1,800

1,400.0 0.0

1,400.0 0.0

1,400.0 0.0

1,400.0 0.0

1,330.5 0.0

1,330.5 0.0

Amortization of Goodwill (4) 155 155 155 179 0 0 0 0 (Depreciation Expenses Ratio) 10.2% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Free Cash flow (1) – (2) – (3) + (4) -3,418 3,222 2,518 2,542 2,363 2,363 2,363 2,363 40,004 Discount Factor 0.94 0.89 0.84 0.79 0.75 0.71 0.67 0.67 PV 3,042 2,245 2,140 1,878 1,773 1,674 1,581 26,771 EPS (yen) 79 147 181 182 183 183 183 183 DPS (yen) 20 30 37 37 37 37 183 183 BPS (yen) 1,344 1,461 1,605 1,750 1,896 2,042 2,042 2,042 Outstanding Shares (million) 12.920 12.9198 12.9198 12.9198 12.9198 12.9198 12.9198 12.9198 Estimated Cost of Shareholders’ Equity 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% ROE/Estimated Cost of Shareholders Equity 0.9 1.5 1.7 1.6 1.4 1.3 1.3 1.3





Case of Operating

Leverage Only (Unit: million yen otherwise specified)



29/29





of the company.

This report is issued by Toward the Infinite World, Inc. under the name of "ANALYST NET" and written by

external partners and analysts as its main authors.

□ In the report issued under the brand name of "ANALYST NET", we are aiming to provide information

and explanations about the target companies using a different approach from the traditional method. In

principle, TIW does not seek a review and authorization against the contents herein. (However, we point

out to the authors only if there are errors or incorrect wording.)

□ TIW may receive compensation directly or indirectly from the target companies in the project proposal

and infrastructure offering to issue this report.

□ External partners and analysts may receive compensation directly or indirectly from the target companies

for their work apart from writing this report. The external partners and analysts may have already been

involved or may be involved in some trading of securities of target companies in the future.

□ This report is created for the purpose of providing information for investors to refer to when they are

making decisions about investments, and not soliciting trading of securities or other financial products.

Investors are responsible for their final decisions on trading of securities or other financial products.

□ Although authors collected information during interviews with the target companies in order to create this

report, the hypothesis and opinions in this report do not reflect the views of such companies, and are from

the authors' own analysis and evaluation.

□ Although this report is based on information that the authors believed to be reliable, we do not guarantee

the accuracy, completeness and/or timeliness of the contents. The opinions and forecasts in this report are

conducted at the time of publication and may be changed without notice.

□ In any event, TIW and authors are not liable for any direct, indirect, incidental, or special damages that the

investors may receive by relying on the information and analysis contained in this report.

□ All contents in this report are the copyright of TIW unless otherwise stated. No part of such information

shall be reproduced, sold, displayed, distributed, published, amended, or used for commercial purpose

without TIW's consent.

□ "ANALYST NET" is a registered trademark of TIW.

Disclaimer